How to Make Money on Penny Stocks
A "penny stock" is one which typically trades for under $5 per share. Penny stocks are most often found on the OTC (over the counter) market. Trading penny stocks is a highly risky endeavor. However, a small portion of any investment portfolio is appropriately allocated to speculative activity. Jim Cramer advises to devote 20 percent or less of your portfolio to speculative stocks. Penny stocks are at the highest end of the risk spectrum. However, the rewards can be substantial when they pay off.
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Things You'll Need
- A brokerage account, preferably online, which is approved for the purchase of penny stocks
Instructions
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Instructions
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Hold penny stock positions long term if you are seeking the proverbial "home run," or alternatively, utilize a strategy entailing many rapid trades seeking to make a small profit on each one. Study and employ technical analysis (charting) if you desire to get in and out of positions quickly. Learn and use fundamental analysis (assessment of profit potential and balance sheets) if you seek to hold positions for longer time frames.
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Refine your ability to quickly identify indicators if you are trading for quick profits. Learn how to analyze earnings and balance sheets if you are attempting to uncover penny stocks with real underlying value, and do not allow short term swings to impact trades predicated upon a long term thesis.
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Sell short penny stocks which have a bearish (pessimistic) outlook. Balance your speculative portfolio between long and short positions to hedge against overall market risk.
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Devise strict money management rules relating to both buy and sell targets. Follow your money management rules fastidiously without allowing for deviations due to the emotions of the moment.
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Keep detailed records of all your trades. Review your losing trades in order to prevent making the same mistake again in the future.
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Tips & Warnings
According to Matt Blackman of Investopedia.com, focus your penny stock selection on stocks in the 5 to 10 cent price range. Sell your losers quickly while letting your winners run when trading for quick profits.
Due to their illiquid nature, the SEC advises that exiting penny stock positions can prove difficult. Beware of fraud associated with many penny stocks.
